4. Allowance for Loan Losses

9 Months Ended

Sep. 30, 2016

Allowance For Loan Losses

4. Allowance for Loan Losses

A summary of changes in the allowance for loan losses follows for the nine months and twelve months ended September 30, 2016 and December 31, 2015:

Nine months ended September 30, 2016 (in thousands)	12/31/15 Balance		Charge-offs		Recoveries		Provision			9/30/16 Balance		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
Allowance for loan losses:
Construction/Land Development	$	4,442	$	294	$	4	$	(869	)	$	3,283	$	1,601	$	1,682
Farmland		95		-		-		(59	)		36		-		36
Real Estate		806		23		4		208			995		219		776
Multi-Family		71		-		-		(47	)		24		-		24
Commercial Real Estate		445		18		114		179			720		53		667
Home Equity – closed end		174		6		-		(78	)		90		-		90
Home Equity – open end		634		348		106		308			700		241		459
Commercial & Industrial – Non-Real Estate		1,055		293		39		(144	)		657		-		657
Consumer		108		35		13		16			102		-		102
Dealer Finance		836		618		164		510			892		18		874
Credit Cards		115		63		44		(24	)		72		-		72
Total	$	8,781	$	1,698	$	488	$	-		$	7,571	$	2,132	$	5,439

Twelve months ended December 31, 2015 (in thousands)	12/31/14  Balance		Charge-offs		Recoveries		Provision			12/31/15 Balance		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
Allowance for loan losses:
Construction/Land Development	$	4,738	$	156	$	85	$	(225	)	$	4,442	$	2,373	$	2,069
Farmland		-		-		-		95			95		-		95
Real Estate		623		25		37		171			806		238		568
Multi-Family		-		-		-		71			71		-		71
Commercial Real Estate		126		-		65		254			445		18		427
Home Equity – closed end		188		26		6		6			174		-		174
Home Equity – open end		154		51		-		531			634		269		365
Commercial & Industrial – Non-Real Estate		1,211		-		62		(218	)		1,055		-		1,055
Consumer		214		32		32		(106	)		108		-		108
Dealer Finance		1,336		251		24		(273	)		836		17		819
Credit Cards		135		60		46		(6	)		115		-		115
Total	$	8,725	$	601	$	357	$	300		$	8,781	$	2,915	$	5,866

A summary of changes in the allowance for loan losses follows for the three months ended September 30, 2016 and December 31, 2015:

Three months ended September 30, 2016 (in thousands)	6/30/16 Balance		Charge-offs		Recoveries		Provision			9/30/16 Balance		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
Allowance for loan losses:
Construction/Land Development	$	3,382	$	-	$	2	$	(101	)	$	3,283	$	1,601	$	1,682
Farmland		38		-		-		(2	)		36		-		36
Real Estate		1,031		-		-		(36	)		995		219		776
Multi-Family		24		-		-		-			24		-		24
Commercial Real Estate		704		-		27		(11	)		720		53		667
Home Equity – closed end		167		5		-		(72	)		90		-		90
Home Equity – open end		963		347		36		48			700		241		459
Commercial & Industrial – Non-Real Estate		793		63		-		(73	)		657		-		657
Consumer		130		12		2		(18	)		102		-		102
Dealer Finance		764		232		107		253			892		18		874
Credit Cards		72		32		20		12			72		-		72
Total	$	8,068	$	691	$	194	$	-		$	7,571	$	2,132	$	5,439

Three months ended December 31, 2015 (in thousands)	9/30/15  Balance		Charge-offs		Recoveries		Provision			12/31/15 Balance		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
Allowance for loan losses:
Construction/Land Development	$	5,154	$	18	$	2	$	(696	)	$	4,442	$	2,373	$	2,069
Farmland		87		-		-		8			95		-		95
Real Estate		486		-		37		283			806		238		568
Multi-Family		82		-		-		(11	)		71		-		71
Commercial Real Estate		95		-		17		333			445		18		427
Home Equity – closed end		160		1		-		15			174		-		174
Home Equity – open end		185		-		-		449			634		269		365
Commercial & Industrial – Non-Real Estate		828		-		2		225			1,055		-		1,055
Consumer		205		8		11		(100	)		108		-		108
Dealer Finance		1,477		140		4		(505	)		836		17		819
Credit Cards		111		4		9		(1	)		115		-		115
Total	$	8,870	$	171	$	82	$	-		$	8,781	$	2,915	$	5,866

The following is a summary of total loans by loan segments, as well as total loans by each segment individually and collectively evaluated for impairment as of September 30, 2016 and December 31, 2015 (in thousands):

September 30, 2016	Loan Receivable		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
Construction/Land Development	$	77,478	$	10,749	$	66,729
Farmland		12,697		-		12,697
Real Estate		168,911		1,984		166,927
Multi-Family		6,929		-		6,929
Commercial Real Estate		143,376		2,940		140,436
Home Equity – closed end		10,775		-		10,775
Home Equity –open end		55,852		1,061		54,791
Commercial & Industrial – Non-Real Estate		28,760		173		28,587
Consumer		7,218		15		7,203
Dealer Finance		63,406		81		63,325
Credit Cards		2,687		-		2,687
	$	578,089	$	17,003	$	561,086
Total

December 31, 2015	Loan Receivable		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
Construction/Land Development	$	69,759	$	12,895	$	56,864
Farmland		13,378		-		13,378
Real Estate		166,587		1,421		165,167
Multi-Family		7,559		-		7,559
Commercial Real Estate		128,032		1,197		126,835
Home Equity – closed end		9,135		-		9,135
Home Equity –open end		56,599		2,573		54,026
Commercial & Industrial – Non-Real Estate		27,954		181		27,773
Consumer		8,219		18		8,201
Dealer Finance		54,086		72		54,013
Credit Cards		2,745		-		2,745
	$	544,053	$	18,357	$	525,696
Total

The following table presents the aging of the recorded investment in past due loans by segments as of September 30, 2016 and December 31, 2015 (in thousands):

	30-59 Days Past due		60-89 Days Past Due		Greater than 90 Days (excluding non-accrual)		Non-Accrual Loans		Total Past Due		Current		Total Loan Receivable
September 30, 2016
Construction/Land Development	$	141	$	49	$	-	$	3,624	$	3,814	$	73,664	$	77,478
Farmland		-		-		-		-		-		12,697		12,697
Real Estate		1,813		802		367		618		3,600		165,311		168,911
Multi-Family		-		-		-		-		-		6,929		6,929
Commercial Real Estate		166		-		-		-		166		143,210		143,376
Home Equity – closed end		7		32		-		-		39		10,736		10,775
Home Equity – open end		177		-		24		1,294		1,495		54,357		55,852
Commercial & Industrial – Non- Real Estate		114		-		-		71		185		28,575		28,760
Consumer		55		11		-		3		69		7,149		7,218
Dealer Finance		818		179		128		67		1,192		62,214		63,406
Credit Card		27		-		-		-		27		2,660		2,687
Total	$	3,318	$	1,073	$	519	$	5,677	$	10,587	$	567,502	$	578,089

	30-59 Days Past due		60-89 Days Past Due		Greater than 90 Days (excluding non-accrual)		Non-Accrual Loans		Total Past Due		Current		Total Loan Receivable
December 31, 2015
Construction/Land Development	$	104	$	-	$	-	$	4,688	$	4,792	$	64,967	$	69,759
Farmland		-		-		-		-		-		13,378		13,378
Real Estate		2,684		1,332		272		1,010		5,298		161,289		166,587
Multi-Family		-		-		-		-		-		7,559		7,559
Commercial Real Estate		340		241		-		-		581		127,451		128,032
Home Equity – closed end		41		7		-		-		48		9,087		9,135
Home Equity – open end		918		46		107		40		1,111		55,488		56,599
Commercial & Industrial – Non- Real Estate		114		3		25		109		251		27,703		27,954
Consumer		120		10		-		-		130		8,089		8,219
Dealer Finance		905		183		152		108		1,348		52,738		54,086
Credit Cards		10		13		15		-		38		2,707		2,745
Total	$	5,236	$	1,835	$	571	$	5,955	$	13,597	$	530,456	$	544,053

The following tables represent the corporate credit exposure by presenting the loan portfolio by the following credit quality indicators (loan grades):

Grade 1 – Minimal Risk: Excellent credit, superior asset quality, excellent debt capacity and coverage, and recognized management capabilities.

Grade 2 – Modest Risk: Borrower consistently generates sufficient cash flow to fund debt service, excellent credit, above average asset quality and liquidity.

Grade 3 – Average Risk: Borrower generates sufficient cash flow to fund debt service. Employment (or business) is stable with good future trends. Credit is very good.

Grade 4 – Acceptable Risk: Borrower’s cash flow is adequate to cover debt service; however, unusual expenses or capital expenses must by covered through additional long term debt. Employment (or business) stability is reasonable, but future trends may exhibit slight weakness. Credit history is good. No unpaid judgments or collection items appearing on credit report.

Grade 5 – Marginally acceptable: Credit to borrowers who may exhibit declining earnings, may have leverage that is materially above industry averages, liquidity may be marginally acceptable. Employment or business stability may be weak or deteriorating. May be currently performing as agreed, but would be adversely affected by developing factors such as layoffs, illness, reduced hours or declining business prospects. Credit history shows weaknesses, past dues, paid or disputed collections and judgments, but does not include borrowers that are currently past due on obligations or with unpaid, undisputed judgments.

Grade 6 – Watch: Loans are currently protected, but are weak due to negative balance sheet or income statement trends. There may be a lack of effective control over collateral or the existence of documentation deficiencies. These loans have potential weaknesses that deserve management’s close attention. Other reasons supporting this classification include adverse economic or market conditions, pending litigation or any other material weakness. Existing loans that become 60 or more days past due are placed in this category pending a return to current status.

Grade 7 – Substandard: Loans having well-defined weaknesses where a payment default and or loss is possible, but not yet probable. Cash flow is inadequate to service the debt under the current payment, or terms, with prospects that the condition is permanent. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the borrower and there is the likelihood that collateral will have to be liquidated and/or guarantor(s) called upon to repay the debt. Generally, the loan is considered collectible as to both principal and interest, primarily because of collateral coverage, however, if the deficiencies are not corrected quickly; there is a probability of loss.

Grade 8 – Doubtful: The loan has all the characteristics of a substandard credit, but available information indicates it is unlikely the loan will be repaid in its entirety. Cash flow is insufficient to service the debt. It may be difficult to project the exact amount of loss, but the probability of some loss is great. Loans are to be placed on non-accrual status when any portion is classified doubtful.

	CREDIT QUALITY INDICATORS (in thousands)
	AS OF SEPTEMBER 30, 2016
	Corporate Credit Exposure
	Credit Risk Profile by Creditworthiness Category
		Grade 1 Minimal Risk		Grade 2 Modest Risk		Grade 3 Average Risk		Grade 4 Acceptable Risk		Grade 5 Marginally Acceptable		Grade 6 Watch		Grade 7 Substandard		Grade 8 Doubtful		Total
Construction/Land Development		$	-	$	1,061	$	12,674	$	39,583	$	11,711	$	1,913	$	10,536	$	-	$	77,478
Farmland			65		-		2,983		3,272		3,943		2,434		-		-		12,697
Real Estate			-		1,168		50,958		81,142		28,400		5,614		1,629		-		168,911
Multi-Family			-		331		3,045		3,363		190		-		-		-		6,929
Commercial Real Estate			-		2,897		30,154		84,555		21,148		1,534		3,088		-		143,376
Home Equity – closed end			-		-		3,352		4,189		1,780		1,454		-		-		10,775
Home Equity – open end			124		1,540		15,299		32,318		4,540		480		1,551		-		55,852
Commercial & Industrial (Non-Real Estate)			1,416		786		6,262		17,655		2,473		78		90		-		28,760
Total		$	1,605	$	7,783	$	124,727	$	266,077	$	74,185	$	13,507	$	16,894	$	-	$	504,778

	Consumer Credit Exposure
	Credit Risk Profile Based on Payment Activity
		Credit Cards		Consumer
Performing		$	2,687	$	70,426
Non performing			-		198
Total		$	2,687	$	70,624

	CREDIT QUALITY INDICATORS (in thousands)
	AS OF DECEMBER 31, 2015
	Corporate Credit Exposure
	Credit Risk Profile by Creditworthiness Category
		Grade 1 Minimal Risk		Grade 2 Modest Risk		Grade 3 Average Risk		Grade 4 Acceptable Risk		Grade 5 Marginally Acceptable		Grade 6 Watch		Grade 7 Substandard		Grade 8 Doubtful		Total
Construction/Land Development		$	-	$	485	$	8,410	$	31,783	$	14,260	$	3,216	$	11,605	$	-	$	69,759
Farmland			66		-		2,615		3,768		4,952		1,977		-		-		13,378
Real Estate			-		955		54,400		76,545		23,695		8,334		2,658		-		166,587
Multi-Family			-		391		3,925		3,046		197		-		-		-		7,559
Commercial Real Estate			-		2,087		25,889		74,337		20,271		4,149		1,299		-		128,032
Home Equity – closed end			-		-		3,549		3,792		1,661		114		19		-		9,135
Home Equity – open end			-		1,657		15,043		31,455		4,827		398		3,219		-		56,599
Commercial & Industrial (Non-Real Estate)			896		646		6,423		17,053		2,281		517		138		-		27,954
Total		$	962	$	6,221	$	120,254	$	241,779	$	72,144	$	18,705	$	18,938	$	-	$	479,003

	Consumer Credit Exposure
	Credit Risk Profile Based on Payment Activity
		Credit Cards		Consumer
Performing		$	2,730	$	62,046
Non performing			15		259
Total		$	2,745	$	62,305